Times Interest Earned (TIE)

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Times Interest Earned (TIE) Ratio

What it is

The times interest earned (TIE) ratio is a solvency metric that measures a company’s ability to meet interest payments on its debt using operating earnings. It shows how many times earnings before interest and taxes (EBIT) cover the company’s interest expense.

Formula

TIE = EBIT ÷ Interest Expense

Where EBIT = earnings before interest and taxes.

How to calculate (example)

If a company has:
* $10 million existing debt at 4% interest
* $10 million new debt at 6% interest
* EBIT of $3 million

Annual interest expense = (4% × $10M) + (6% × $10M) = $1M
TIE = $3M ÷ $1M = 3.0

A TIE of 3 means the company generates three times the earnings needed to cover its annual interest payments.

Interpretation

  • Higher TIE = greater ability to meet interest obligations and more financial flexibility to invest in growth.
  • Lower TIE = potential financial stress or heavy debt burden.
  • As a general guideline, a TIE above 2.0 is often considered acceptable, though acceptable levels vary by industry and company stability.

Special considerations

  • Industry differences: Companies with stable, predictable earnings (e.g., utilities) often carry more debt and can sustain lower relative risk because lenders view them as better credit risks. Startups and firms with volatile earnings typically rely more on equity until they build consistent cash flows.
  • TIE is a solvency ratio, not a profitability ratio. It evaluates the capacity to pay interest, not overall profitability.
  • A TIE below 1 (for example, 0.90–1.0) indicates earnings are insufficient to cover interest expenses, which is a serious solvency concern.

How to improve TIE

  • Increase operating earnings (raise revenue, improve margins).
  • Reduce operating expenses.
  • Pay down principal to reduce interest expense.
  • Refinance existing debt at lower interest rates.

Bottom line

The TIE ratio is a simple, useful indicator of a firm’s ability to service interest on debt using operating income. It should be used alongside other financial ratios and qualitative context (industry norms, earnings stability) to assess a company’s creditworthiness and financial health.